Setting the cap

Discussion in 'The Business of Hockey' started by Peter10, Dec 16, 2005.

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  1. Peter10

    Peter10 Registered User

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    Hi folks,

    it might have been (probably) discussed here already but havent been around for a while.

    How exactly is the cap determined? I mean, the NHL calculated with an 1.8 billion revenue for this year. Devided by 30 and then 54% of it, makes $32.4m average payroll per team while the cap is at $39m. Most of the teams are above the average $32.4m so the $39m doesnt make much sense, even with 10-15% escrow.

    Is there any sort of formular how the cap is set? Like 54% (or 55 or 56 or 57 pending on the revenue) of the the revenue devided by 30 and then adding x% or whatever? Its a question that bugs me since the CBA was signed.
     
  2. hockeytown9321

    hockeytown9321 Registered User

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    They take a set % of revenue, divided by 30 to get the midpoint. They have a negotiated range for each season. I think its $16M from now own, so the cap is set $8M above the midpoint, the floor is $8M below.
     
  3. cringer

    cringer Registered User

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    Right, the 39 million is just the top end of the range determined by projected revenue. The 39 million per team figure actually assumes 2.2 billion revenue (roughly).

    The range is only in place to keep teams from not spending too much more or less than the ball park of what is estimated to be 54% of total revenue.

    As noted, the player's have a chunk of their salaries frozen in escrow, so in the event that, at the end of the season, it is determined that total player payroll exceeded 54% of actual revenue... the owners get re-imbursed.

    Team payrolls in relation to revenue are examined periodically throughout the season in order to determine the escrow amount withdrawn from player's paychecks. So theoretically, there should always be enough funds in escrow to cover the difference, even if all teams were spending at or close to the cap limit.
     
  4. Fugu

    Fugu Guest

    The $39 million cap is based on revenues of $1.8 billion.

    Next year's cap will be based on the actual revenue seen by the end of this year, currently projected to be $2.0 billion. That is why the cap's top limit may go to $41-45 million. If revenues get to $2.2 billion, the cap's top limit can be as high as $49 million.
     
  5. Peter10

    Peter10 Registered User

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    The question that still stands for me is, is there a way to calculate the cap for certain revenues? I mean we all know how to figure out how much money is going to the players with certain amounts of revenues. We can calculate whats the average any team can spend to hit the percentage of revenue for the players. What we cant, is to say with a revenue of $2.2B the cap will be set at $X
     
  6. GSC2k2*

    GSC2k2* Guest

    Yes. The way is to apply the formula.

    THe percentage varies slightly according to revenue. 53% at the current level, which goes up to 54 and 55 at certain levels (see the NHL CBA FAQ).

    Multiply the revenue by the players' percentage.

    Deduct from that figure the players' benefits of about $66 million.

    Divide that figure by 30 to find the average payroll per team.

    Add $8 million. That is the cap.

    Deduct $8 million. That is the floor.
     
  7. Captain Ron

    Captain Ron Registered User

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    Can't get any more simple than that.:clap:
     
  8. hockeytown9321

    hockeytown9321 Registered User

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    Wrong again. The players' share never dips below 54%. It says so on the site you mentioned but evidently did not read. I'm not surprised.
     
  9. GSC2k2*

    GSC2k2* Guest

    You are right. 54% is the base. I don't know why I typed that. I even forgot that it can go all the way up to 56 and 57.

    Well done on your correctness. That makes one for you ... and a hundred for me. Booyah.
     
  10. Captain Ron

    Captain Ron Registered User

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    Now boys lets try to have a mature, rational conversation without resorting to playground banter. ;)
     
  11. GSC2k2*

    GSC2k2* Guest

    My dad could beat up your dad ...
     
  12. Captain Ron

    Captain Ron Registered User

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    One thing you forgot to do though gscarpenter2002 is the 5% revenue growth that is to be figured in.


    Here is how the league supposedly will do it.


    Let's say the league has $2 billion in revenue.

    $2,000,000,000 = Revenue

    Take out $66 million in benefits

    $2,000,000,000
    - 66,000,000
    ---------------
    $1,934,000,000 = Revenue-Benefits

    Now add in 5% assumed revenue growth

    $1,934,000,000 + 5% =
    --------------------
    $2,030,700,000 = Total Adjusted Revenue

    Multiply that by 54% for the players share

    $2,030,700,000 X 54% = $1,096,578,000 = Players Share

    Divide that by the 30 teams

    $1,096,578,000 / 30 = $36,552,600 = Salary Midpoint

    Subtract $8 million to get floor and add $8 million to get the ceiling. You would have a salary range of

    $28,552,600 - $44,552,600

    Clear as crystal.
     
  13. Peter10

    Peter10 Registered User

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    Just wondering where do you get that $8m from? This year the Cap is at 39m and the floor at 21.5m, isnt it? That makes a difference of 17.5m instead of 16m. The difference between the floor and the avg payroll per team is also bigger than the difference between the cap and the avg payroll.
     
  14. Captain Ron

    Captain Ron Registered User

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    For this year only the league made the salary range $17.5 million. To give teams a little leeway in adjusting to the new salary cap (so teams didn't have to cut/add too much salary to the roster). Starting next season and every season after that the $16 million salary range will be used.

    I am not entirely sure what the question is here. Can you rephrase it?

    I will try to answer what I think you are asking. You are wondering why the leagues average salary is above the mid-point of the salary range correct?

    If that is the case the answer is that the league will allow every team in the league to go to the salary cap if they want. The league put a clause into the new CBA that states that a certain % of the players paycheck will be withheld and deposited into an escrow account. If at the end of the year the players total salary exceeds 54% of league-wide revenues then the league will keep some of the money and return the remainder to the players. The players will never be able to make more than a certain % of league revenues.

    Does that answer your question?
     
  15. Captain Ron

    Captain Ron Registered User

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    For the benefit of some here is how they got the salary cap figures for the 2005-06 season.

    Revenue Projections

    $1,740,000,000

    Minus player benefits of $60 Million

    $1,740,000,000
    - 60,000,000
    ---------------
    $1,680,000,000 = total adjusted revenue

    $1,680,000,000 X 54% = $907,200,000 = Player's Share

    $907,200,000 / 30 Teams = $30,240,000 = Average Salary Mark

    Then add/subtract $8.75 Million to get the salary range.

    That makes the salary range $21.49M - $38.99

    Then it was rounded to $21.5M - $39M
     
  16. kdb209

    kdb209 Global Moderator

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    The one open question is the ~$66M in benefits ($2.2M/team) deducted before or after the multiply by 54% - I have seen examples do it both way. It would make more sense for the $66M in benefits to be taken off after the 54%, since they are part of the total player costs.

    Since we don't know the exact magic number the league used for it's '05-'06 revenue estimates or the exact number for benefits, we can't back track the numbers to verify the algorithm, but recently the $1.8B number has been bandied about, so, if we assume that the benefits come out of the players share (post 54%):

    Total Revenue Estimate: $1.8B
    Players Share: $1.8B * 54% = $972M
    Minus Benefits: $972M - $66M = $906M
    Salary Midpoint: $906/30 = $30.2M
    Salary Cap: $30.2M + $8.75M = $38.95M - round to $39M
    Salary Floor: $30.2M - $8.75M = $21.45M - round to $21.5M

    The numbers seem to work out for a revenue estimate of $1.8B, benefits of $2.2M/team, and benefits costs coming out of the players share.

    Based on that, cap projections can be made with the following adjustments:
    - Total revenues are based on this years real revenues plus a 5% inflation factor
    - The Cap/Floor spread is reduced from $17.5M this season to $16M next season - midpoint +/- $8M.
    - The player share increases to 55% @ $2.2B

    '05-'06 Actual Revenues: $1.8B
    5% escalator: $1.8B * 1.05 = $1.89B
    Players Share: $1.89B * 54% = $1020.6M
    Minus Benefits: $1020.6M - $66M = $954.6M
    Salary Midpoint: $954.6M/30 = $31.82M
    Salary Cap: $31.82M + $8M = $39.82M
    Salary Floor: $31.82M - $8M = $23.82M

    '05-'06 Actual Revenues: $2.0B
    5% escalator: $2.0B * 1.05 = $2.1B
    Players Share: $2.1B * 54% = $1134M
    Minus Benefits: $1134M - $66M = $1068M
    Salary Midpoint: $1068M/30 = $35.6M
    Salary Cap: $35.6M + $8M = $43.6M
    Salary Floor: $35.6M - $8M = $27.6M

    '05-'06 Actual Revenues: $2.2B
    5% escalator: $2.2B * 1.05 = $2.31B
    Players Share: $2.31B * 55% = $1270.5M
    Minus Benefits: $1270.5M - $66M = $1204.5M
    Salary Midpoint: $1204.5M/30 = $40.15M
    Salary Cap: $40.15M + $8M = $48.15M
    Salary Floor: $40.15M - $8M = $32.15M
     
  17. Peter10

    Peter10 Registered User

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    First of all, thanks for the answer and the math.

    My original question came up, because i hadnt heard about the $16m, but with that it makes the calculating easier. Has any of you a prove that it is $16m (not that i dont trust you ;) ) and does it stay that way over the duration of the CBA?


    Well my question answered itself, as it came up due to my bad math. ;) I was thinking that the avg payroll per team was like $32.4m and not $30.24 (forgot the benefits). So the difference to the cap was $6.6m and to the floor it was $10.9m.

    Btw, has anyone a copy of the CBA who likes to share it? :D
     
    Last edited: Dec 19, 2005
  18. GSC2k2*

    GSC2k2* Guest

    True for caps going forward. The question was what was the cap for a given revenue number. That was the question I answered. For the other question not asked (albeit relevant), your answer is correct.
     
  19. Captain Ron

    Captain Ron Registered User

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    Here is an article from Bob McKenzie about the salary range.

    http://www.tsn.ca/columnists/bob_mckenzie.asp?id=130373

     
  20. Ovechkin

    Ovechkin Registered User

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    How are they going to do the cap floor? If the cap goes up lets say 4 million, does the floor go up by the same ammount?
     
  21. Captain Ron

    Captain Ron Registered User

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    kdb209.......using the figures the league has used as examples

    The $66 million in benefits would have to come out first. Because with revenues of $2 Billion their salary range is $28.55M - $44.55M.

    Using your formula the salary range would be $27.6M - $43.6M.
     
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